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Oregon Measure 95 to "Reduce Risk" by Investing in Stocks? Ha Ha Ha Ha.


Naiveté runs deep in the notion that investing in stocks from current extremely overpriced levels will somehow reduce risk. Yet that's how the Oregon voter's pamphlet summarizes Measure 95:

"This measure allows investments in equities by public universities to reduce financial risk and increase investments to benefit students. Additional investment income could benefit students by minimizing tuition increases and enhancing student programs."

If you voted "yes" on Oregon Measure 95, in concept that's a good call on your part. Oregon universities need to have the opportunity to broadly diversify their investment portfolio (and it was a surprise to me they didn't already have it).

But as with most things, the devil is in the details and, in this case, especially in the implementation. My concern is the measure passes, the floodgates open, and universities trip over each other to shift their portfolios into stocks...all jumping into the canoe as we're headed toward the sizable waterfall that we can't quite see but know is coming.

Poof! How come my tuition went way up instead of down?

I like to remind folks that the risk-return tradeoff is not a knob. You can't simply dial up the risk and automatically get higher returns as well. That's the naive approach implied in Measure 95's summary. There are times (like now, in my view) when the likely return you get won't come close to rewarding you for the risk taken. At such times, it's just dumb to take unnecessary risk. Better to wait until the risk-return tradeoff is more in your favor.

Jesse Felder of the The Felder Report beat me to the punch blogging on this. I highly recommend a quick read of his You're Crazy If You Think Investing in Equities Today Will "Reduce Risk."  He covers a lot of the same overvaluation issues I've been preaching on to my clients for some time now. It appears that Felder and I are in the same camp regarding (probable) poor average annual returns over the next 7 to 10 years for buy-and-hold investors.

Measure 95 is a good idea. But if it passes, we'll need wise implementation not naive assumptions about investing in stocks.